Liberalization increases competitive pressures on domestic firms, creating incentives for reducing costs of production through technological progress. Through this channel, backward countries get a chance to narrow the technological gap with advanced countries. In this paper, the case of transition countries is analyzed. A model of oligopolistic firms' strategic decision on R&D is developed to motivate the empirical analysis. The results suggest that initial conditions on size of the gap, and openness, as well as the stage of the market reforms, in particular, rate of liberalization and structure of markets are important factors in narrowing the technology gap.